To amend the Internal Revenue Code of 1986 to increase the limitation on distributions from 529 accounts for qualified higher education expenses.
Summary
S. 2206 proposes to amend the Internal Revenue Code of 1986, specifically section 529(e)(3), to increase the limitation on distributions from 529 accounts for qualified higher education expenses. The bill aims to raise the distribution limit from $10,000 to $20,000. This change would apply to taxable years beginning after December 31, 2025.
The bill was introduced in the Senate on June 30, 2025, by Mr. Schmitt and referred to the Committee on Finance. The intended effect is to allow families to use a larger amount of their 529 savings for educational expenses without tax implications.
This adjustment seeks to provide greater financial flexibility for families saving for higher education.
Expected Effects
The primary effect of this bill, if enacted, would be to double the amount that can be distributed from 529 accounts for qualified higher education expenses without incurring tax penalties.
This would allow families to use up to $20,000 per year from these accounts for expenses like tuition, fees, books, and room and board. The change would be effective for taxable years beginning after December 31, 2025.
Potential Benefits
- Increased Financial Flexibility: Families can access more of their savings for education expenses without tax implications.
- Encourages Savings: Higher distribution limits may incentivize more families to save for higher education through 529 plans.
- Reduced Financial Burden: Eases the financial strain on families covering college costs.
- Simplifies Financial Planning: Provides a clearer picture of how much can be withdrawn annually without penalty.
- Supports Educational Attainment: By making funds more accessible, it supports students in pursuing higher education.
Potential Disadvantages
- Potential for Increased Tax Burden Elsewhere: To offset the tax benefit, other areas might see increased taxes or reduced government services.
- Disproportionate Benefit to Higher Income Families: Those who can afford to contribute more to 529 plans will benefit the most.
- Complexity in Tax Code: While seemingly simple, changes to tax laws can create unforeseen complexities.
- Possible Inflation of Education Costs: Increased availability of funds could contribute to rising tuition costs.
- Limited Impact on Low-Income Families: Families with limited savings may not see a significant benefit.
Constitutional Alignment
The bill appears to align with the general welfare clause of the US Constitution, as it aims to promote education by increasing the accessibility of funds saved for higher education. Article I, Section 8, Clause 1 grants Congress the power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States.
However, the Constitution does not explicitly address education savings accounts or specific tax policies related to education. The power to regulate and legislate in this area is generally understood to fall within the broad scope of congressional authority.
Therefore, the bill's alignment with the Constitution is based on the interpretation of the general welfare clause and the implied powers of Congress to enact laws that promote education and economic well-being.
Impact Assessment: Things You Care About ⓘ
This action has been evaluated across 19 key areas that matter to you. Scores range from 1 (highly disadvantageous) to 5 (highly beneficial).